First Multi-family purchase. Very rough numbers but so far looks promising. Any opinons or suggestions

15 Replies

I just raised enough capital for my first Multi-family purchase and have been looking for a couple months now for a good buy. I'm looking in several different areas in Michigan. The areas I'm primarily focused on are Livingston County, Kalamazoo, Ann-Arbor, Ypsilanti and Lansing. I would like to buy several units and have all of them within the same area making management easy. I think I finally found one that's worth taking to the next stage and contacting the seller's agent to set up a walk through, here are the quick rough numbers….

Purchase Price: $129,000

Down: $25,980 (20%) 

Payment/Month: $775 ($9300) 

Closing costs: $1249 

Management costs: $298 ($3570) 

Expenses: $298 ($3570) 

Average Rent/Unit: $745

Total First Year Expenses: $43681 

Total First Year Income: $35760

The building is a 4-Unit, 2 bed 1 bath per unit, that appears to be in average shape and the description claims to have a "clean and updated interior" but no interior pictures are posted online. It is also in a good neighborhood of Kalamazoo, 5-10min from WMU campus. 

What do you all think? Worth it to take up to the next level? Like I said 100% rookie here so everything helps. Thanks

Do you see your last 2 lines......your paying 8k to own it...sounds crazy to me... For your 25k you could pay cash for a 3/2 SFP (student) with a property line shared with WMU....or next to that is 2 more 3/2...3/1...15K each cash...students pay $500 a bedroom that close to the school. By the way, I am a realtor the Kalamazoo area, and can get in to take interior pics for you, but I would need to be your represenative. They are on the MLS

Presumably the 2nd year ROI would be much more attractive. Without the closing costs and down payment, these numbers show about $16,000 in expenses, which would be great cash flow.

I don't know where this is, but I'm skeptical that a 2/1 is renting out for $745. There are a lot of decent-sized homes in Kalamazoo that can't bring in that much per month. My duplex in the Westwood neighborhood (5 mins from WMU) is $715 for 2/1 and about 1000 sq ft.

Make sure you ask a couple of management companies and local Realtors about the potential rent.

As I found with a lot of the multi-family opportunities, any landlord-paid expenses will demolish most of your cash flow. Are each of the units metered separately for gas, electric, and water/sewer? How does the trash bill work out?

In any case, if you're a 100% rookie, contacting the seller's agent and taking a look is a great choice. If nothing else, you'll gain experience with the process. Don't get emotionally involved and be skeptical of any numbers you're given second-hand. 

It breaks the 1% & 2% rule(s), but I would want to see the insurance and taxes as well (unless the payment included one or both of those) so that I could figure out the cap rate. Like what @Josiah Swartz said, be skeptical of numbers given to you, and definitely double-check the rent. There are even some sites who can give you rent comps, but a realtor and PM would be able to help.

Depending on your investment strategy, you may also want to consider putting less down - it would take away a little of your cash flow, but would allow you to buy the next property. Just a consideration - nothing wrong with the 20% down if you are doing so for a specific reason. 

Good luck!

@Corey Hajduk @Stephan Haas I'm also a bit new to the multi family investing game. Love these analysis posts. What I'm wondering is, I don't remember seeing the down payment considered along with expenses.wouldn't that be done in a cash on cash view of the property in which case at 700$ a unit you'd be 33,600$ income less $20,000 expenses
= $13,000 cash return and a CoC return of over .30 am (am I missing something deal seems okay to me)

The payment includes taxes but not insurance. The only reason I would do 20% down would be to make it easier to finance through a traditional lender. The rental quotes are just an average from rentometer.com from the immediate area so they are probably high for a 4plex. Right now I am currently looking into the homes that @Stephan Haas mentioned. (if you read this please contact me) 

Thanks for all the sound advice. I am really looking forward to starting this new adventure and will keep you all filled in. 

You are right @Ariel Muller . I was trying to be conservative and not counting all the equity and cash on cash exchanges. I am looking at in a very pessimistic way in case of worst case scenario. 

 I would say take the time and look at it regardless.  If nothing else you would learn a lot from the action taken.

@Corey Hajduk

Medium bayit properties llc logo designSheryl Gurvey, Bayit Properties LLC | [email protected]

@Corey Hajduk  What type of loan would you get?  How much are you setting aside for reserves?  How much are you going to have to invest Day 1 to ensure the property is clean and attractive?  IF the rents are accurate and you don't have to invest any money Day 1 to get the property rent ready, here is my quick back of the envelope analysis.

Income = $35,760 ($745/month x 4 x 12 months)

Minus 15% for vacancy, loss to lease, etc

Effective Gross Income = $30,396

Expenses = $18,237 (60% of EGI)

Net Operating Income (NOI) = $12,159

Minus $100/unit/month in reserves = $4,800 

Cash flow before debt service = $7,359

_______________________________________________

Purchase Price: $129,000

Down: $25,980 (20%)

Loan = $103,200 

Annual loan payment (assumes 30 yr amortization, 4.25% interest rate) = $6,071 

_________________________________________________

Cash flow before debt service = $7,359

Minus Annual loan payment  = $6,071

Annual cash flow = $1,288

$1,288 / $25,980 = 4.96% cash on cash return

Account Closed- First of all thank you for that. I am going with a traditional 30yr like you mentioned except I will be at a 4.3. For reserves I will be covered for 6 months of mortgage and expenses in case of vacancies. Right now 3 out of the 4 units are under lease and the 4th one remains open for showing purposes only (I presume). I have not been able to look at the 3 that are currently leased but besides a little touch-up here and there and a bit of curb appeal it appears to be a straight turn-key property. I am unsure of how long the tenants are under lease since I have yet to get the actual bank roll. Also I am unsure of the current rent. I will get all those answers Monday. One question I have for you is about the expenses you have on the analysis, 60% seems high to me but once again I am new. Is 60% a good rule of thumb to follow? 

@Corey Hajduk

What year was the property built? 

Typically, on newer construction (2005 or newer) you can expect expenses in the 35% range, on properties built 1980 - 2004 45-50% is typical and older than 1980 I typically run 55-60%.  It is NOT an exact rule, more like a rule of thumb.   You need to set up a budget, compare that to the current owners financials and see where you have exposure.

Also, with regards to reserves, you should put aside a set amount of money every month or year to deal with capital items so when you need to replace a roof, it doesn't kill your year.  

Thanks, after talking to the agents I decided that this property wasn't for me. The current expenses are too high and the current rent is too low. I do beleive with proper management it could possibly be turned around and there is still potential there but that is not what I am looking for right now. To answer your questions though, the house was built in 1971 and I have a rule to always set aside 20% per month in an expense account.

Corey,

     Were you able to get actual expenses or just estimating?  The expenses used in the scenarios above are very high for a 4-plex.  In my area and many other areas if you're able to find properties for $129k, which brings in roughly $36k a year.  It would be considered a gold mine and people would be fighting over it all day long.  Even a $129k 4-plex bringing in $26k yearly would fly off the shelves.  Just wondering what actual expenses there are that are so high?

Originally posted by @Account Closed :

@Corey Hajduk  What type of loan would you get?  How much are you setting aside for reserves?  How much are you going to have to invest Day 1 to ensure the property is clean and attractive?  IF the rents are accurate and you don't have to invest any money Day 1 to get the property rent ready, here is my quick back of the envelope analysis.

Income = $35,760 ($745/month x 4 x 12 months)

Minus 15% for vacancy, loss to lease, etc

Effective Gross Income = $30,396

Expenses = $18,237 (60% of EGI)

Net Operating Income (NOI) = $12,159

Minus $100/unit/month in reserves = $4,800 

Cash flow before debt service = $7,359

_______________________________________________

Purchase Price: $129,000

Down: $25,980 (20%)

Loan = $103,200 

Annual loan payment (assumes 30 yr amortization, 4.25% interest rate) = $6,071 

_________________________________________________

Cash flow before debt service = $7,359

Minus Annual loan payment  = $6,071

Annual cash flow = $1,288

$1,288 / $25,980 = 4.96% cash on cash return

I'm fairly new also, but looking at these number.  It's being suggested that roughly 80% of gross income goes into expenses (vacancy, maint, cap ex, reserves).  Leaving $7359 to pay off the loan?  Is this correct?  How does anyone make money in this particular town?  Are there any deals in this particular town which does make sense?  I'd like to see a few if possible.  As initially the purchase price to income ratio looked very good, $129k / 36k = 3.5%, which would be a killer deal in most markets. 

@Tou V. @Corey Hajduk

My experience comes from dealing with bigger deals (typically apartment buildings over 100 units), so maybe I am too high with my expense assumptions.  On a 4-unit deal, small tweaks will result in big differences.  Maybe @Ben Leybovich can review my assumptions on expenses and let me know if my initial assumptions above are too conservative?

I don't want to lead anyone astray and as I said I'm typically dealing with much larger deals.  

If you were running much lower expenses, say 40%, and eliminate the monthly reserves, the deal looks amazing.

Income = $35,760 ($745/month x 4 x 12 months)

Minus 15% for vacancy, loss to lease, etc

Effective Gross Income = $30,396

Expenses = $12,158 (40% of EGI)

Net Operating Income (NOI) = $18,238

Minus $100/unit/month in reserves = $0

Cash flow before debt service = $18,238

_______________________________________________

Purchase Price: $129,000

Down: $25,980 (20%)

Loan = $103,200

Annual loan payment (assumes 30 yr amortization, 4.25% interest rate) = $6,071

_________________________________________________

Cash flow before debt service = $18,238

Minus Annual loan payment = $6,071

Annual cash flow = $12,167

$12,167 / $25,980 = 47% cash on cash return

Have you tried looking for distressed properties which you can secure Hard Money loans with? 

After your out of pocket expenses such as closing costs and down payments you can use the left over money from loan to rehab the property and lease it. Also, the property is immediately more valuable and can profit after the sale.

Buy 120k desirable property with large DP and cashflow

or

Buy 70k (120k after repair value) undesirable property with little DP and cashflow after repairs and leases are set in place

(for examples sake leave the numbers as is)

You should make capital gains and cashflow right on the BUY!

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